Saturday, August 21, 2010

Purchasing Power Parity

We have on varied and multiple occasions breathed long and vocal sighs when we hear the large dollar/pound/euro salaries and benefits that our very close and dear friends earn when they work in developed countries like USA, UK, Netherlands, Australia, etc (at least I do this purposefully on every occassion :)) What we tend to dismiss with the wave of our hand or the flick of our finger is their living expenses based on a certain minimum lifestyle in such countries. Obviously this applies to people who have stayed back for some duration like for say 4-5 years and not the other set of friends who were there on a short stay (how they behave is beyond of the scope of discussion in a blog post!) And this is where we should think of Purchasing Power Parity or more commonly known as PPP.

PPP: In simple terms it is difference in cost of a Big Mac at McDonalds in your native country vs. in the foreign country you are comparing to. Or you could say it is the cost of a meal/ movie/ party/ car/ house/ etc. in the countries you are putting in the comparison bucket. Again always look at averages across items, and across geographical regions within each country. So the coffee your NRI friend buys for $4 you can very well buy for ₹25 here - its like saying that the value of $4 is the same as the value of ₹25.

Are there any standard measures: Not really. Over the years various economists and organizations have tried to do something in this direction without much success or recognition. Although the Big Mac Index has some popularity in this matter - it was first popularized by The Economist. It essentially tracks the price of a Big Mac produced and sold across 120 countries that have a McDonald's outlet. Since this burger is a standardized product it is very loosely indicative of PPP or currency under/over valuation. Again, it is not a serious economic indicator, as in no country would probably base its economic policy on this. But it comes in handy when you want to write a post like this !

Why should I be bothered: Well, we probably wouldn't even use it in our day-to-day life unless you are economic policy advisor to the Government of India. But it helps to look at things in perspective, and realize errors in leading media articles like this on TOI today. I usually am wary of our media - half the time their content and the journalistic quality is such crap such that I cringe to pick up the morning newspaper. Some have gone so bad that their editorials come out as incoherent jingoistic babble in favor of the babus and netas. But this particular piece takes the cake pretty near the bottom. Aren't newspapers supposed to raise awareness about issues that people are concerned with ?? And not mislead the junta ??

Oh, by the way, my favorite newspaper is "Bangalore Mirror" - flawless and entertaining in their coverage of storm drains, petty theft, celebrity sightings, and your sex problems! What more can you ask for ??